Australia’s central bank kept interest rates at a record low 2.75 percent on Tuesday, adopting a wait-and-see approach to a lower Aussie dollar and the impact of earlier cuts on the economy.
The Reserve Bank of Australia (RBA) left the door open for further cuts in an unusually brief memo leaving the official cash rate at 2.75 percent — a level unseen since the 1959 start of the RBA.
RBA governor Glenn Stevens said last month’s surprise 25-basis-point cut had seen the stubbornly high Australian dollar come off the boil but there was further unwinding ahead.
“The exchange rate has depreciated since the previous board meeting, although… it remains high considering the decline in export prices that has taken place over the past year and a half,” Stevens said.
“The board judged that the easier financial conditions now in place will contribute to a strengthening of growth over time.”
Until recently the commodities-linked Aussie had been on a protracted run against the US dollar, consistently trading at or above parity with the greenback since October 2010.
It has fallen 6.5 percent since early April.
The dollar’s strength, despite a fall in commodity prices, has squeezed the Australian economy, eroding government revenues and pressuring industries such as manufacturing and tourism.
Stevens noted that soft inflation conditions “may provide some scope for further easing, should that be required to support demand”, leaving more cuts on the table but judging current monetary policy as “appropriate for the time being”.
Inflation was 2.5 percent on-year in the first three months of 2013 with growth running at 3.1 percent amid warnings that mining investment — Australia’s key economic driver — is nearing its peak.
Treasurer Wayne Swan said the economy “is in transition and of course that won’t be seamless, particularly with the dollar still at high levels”.
“While mining investment remains at very high levels and the production and export phase is still ramping up, it’s encouraging to see the benefits of lower interest rates flow through to increased activity in non-mining sectors,” Swan said.
Analysts said the latest growth data, due Wednesday, is expected to show further cooling in mining-powered Australia as investment declines, meaning further cuts were likely as early as July.
“Overall, we still think the RBA will need to provide more stimulus over the coming months to help compensate for the slowing mining sector,” said Capital Economics analyst Daniel Martin.
Stevens said growth remained at below-average pace according to recent data, with unemployment edging higher to 5.5 percent in April, and borrowing subdued.
“The easing in monetary policy over the past 18 months has supported interest-sensitive areas of spending and has been reflected in portfolio shifts by savers and higher asset values,” he said.
“Further effects can be expected over time.”
The Australian dollar was little changed by the decision, fetching 97.25 US cents.
The RBA expects growth of 2-3 percent in the year to June 30, 2014; Canberra has forecast 2.75 percent.
Australian central bank keeps rates at 2.75%
